Structure of electricity distribution charges (2008)

The G3 group of electricity distribution network operators in Great Britain was established by E.ON Central Networks, ScottishPower EnergyNetworks and SSE Power Distribution to collaborate on aspects of the development of methods for setting distribution use of system charges.

The G3 companies asked Reckon to conduct an external, independent review of its proposals before applying for Ofgem's permission to put them into practice.

Our report, published at our client's request, examined the principles underpinning the "forward cost pricing" method proposed by the G3 companies to determine the structure of use of system charges to the EHV elements of their distribution networks, and compared it with the "long run incremental cost" approach adopted by WPD, another distribution network operator. We took account of both the incentives for customers given by different methods for setting distribution network access charges, and the competition law compliance issues raised by some of these methods.

We concluded that:

The G3 method provides an improvement over the current charging method in terms of aligning incentives for customers, and it is a possible base from which to develop better methods in the future.

Both the WPD method and the G3 method may not fully meet Ofgem's objectives, and we cannot reach any view on whether the imperfections of the WPD method are more or less significant than those of the G3 method. Neither method addresses the risk of inefficient construction of private networks for loads that are locally supplied by distributed generation.

The WPD method creates a risk of non-compliance with the Article 82 (and its UK equivalent) competition law prohibition on excessive pricing. Regulation does not protect distribution companies from such claims, and the G3 companies may legitimately take the view that these risks prevent them from putting forward a method similar to WPD's as an option for the structure of charges on their networks.